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Spreading holiday cheer with year-end giving

Published on December 20, 2023 | LPL Financial

The holidays are nearly upon us – a time of giving, goodwill to others, and embracing traditions. For many people, giving to a charity or organization that aligns with your values provides a sense of fulfillment. If you itemize deductions on your income tax return, you can deduct gifts made to charities. Here are six year-end giving strategies to spread holiday cheer with the additional gift of potential tax benefits.

1. Making cash gifts

If you give cash, you may deduct up to 60% of your adjusted gross income (AGI). Giving cash also provides the charity better flexibility when it comes to spending the money to help the people, animals, or the environment. Two disadvantages of giving a cash gift are liquidating a stock, bond, or other appreciated asset and being responsible for the generated capital gains tax, and you also don’t always know how the money is necessarily being used.

2. Donating Stocks, Bonds, or other appreciated securities

If you are considering donating the earnings from appreciated stocks, bonds, real estate, or other appreciated non-cash assets directly to your charity of choice you may want to think about giving the appreciated asset directly to the charity over giving cash after selling them. This may be a beneficial strategy as it allows you to avoid the capital gains tax so long as you adhere to the rules. In addition, you would be eligible for a charitable income tax deduction up to the fair market value of the security you donate, up to 30% of your AGI. A financial professional can help you with the nuances of this type of giving strategy.

3. Donor-advised fund (DAF)

A DAF is a fund managed by a third party that handles charitable donations given to a specified charity. Donors become eligible for an immediate tax deduction in that calendar year. They can give anonymously, knowing that the money can grow tax-free, and may be able to bypass capital gains taxes. There are various ways to give, including cash, stocks, bonds, and other appreciated assets. There are a couple of things to consider when deciding on a DAF. Initially, there may be a high start-up cost. Funds are not eligible for donor benefits, for example, scholarships and tickets, and there is limited control regarding grant-making. Being a DAF donor also gives you the authority to recommend grants from the fund to charitable organizations you support over time.

4. Bunch your charitable gifts

Bunching your donations is a tax strategy where you make a multi-year contribution in a single year to maximize your itemized deduction for the year in which you make your donations. The strategy is to make your itemized deductions (including charitable donations) large enough to exceed the standard deduction amount. Bunching charitable gifts involves timing and the amount you plan to give. This has become a popular strategy after the Tax Cuts and Jobs Act of 2017 that nearly doubled the standard deduction through 2025. You have to remember that your donations must be to qualifying charitable organizations, generally non-profits with tax-exempt status under section 501(c)(3) of the IRS code.

5. Contribute restricted stock

If you contribute directly to a public charity, including sponsors of donor-advised funds, the donor can qualify for an income tax deduction for the full fair market value (FMV) of the securities in an amount up to 30% of the donor’s adjusted gross income, with a five-year carryforward for any excess not deductible in the year of the contribution. When giving stock as opposed to the after-tax proceeds from selling the stock, the charity receives the full value of the appreciated stock and the donor is not subject to capital gains tax on the appreciation in the stock.

6. Combine tax-loss harvesting with a cash gift

Tax-loss harvesting involves using capital losses to offset capital gains up to $3,000 of ordinary taxable income. Donors who itemize their deductions can then claim a charitable deduction for donating cash from the sale proceeds. But, to use this method, you have to understand when to apply it. Tax-loss harvesting only works on taxable investments.

Several retirement accounts, for example, IRAs and 401(k)s are tax-deferred and therefore are not eligible to be used to offset taxable gains. Also, if you are somebody that just invests in mutual funds or exchange-traded funds (ETFs), tax-loss harvesting may be more difficult because to use tax-loss harvesting, the whole fund has to be down, therefore limiting its tax-saving capability.

Year-End Giving, Your Financial Professional, and You

Charitable giving and the potential tax benefits are often complex and decisions not carefully weighed could impact you and your financial goals. Consider consulting a financial professional before making any financial decisions that could put a damper on your holiday cheer this year.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The tax-loss harvesting and other tax strategies discussed should not be interpreted as tax advice and there is no representation that such strategies will result in any particular tax consequence. Clients should consult with their personal tax advisors regarding the tax consequences of investing and charitable giving.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by LPL Marketing Solutions


Using Restricted Stock and Other Equity Awards for Tax-Smart Giving (fidelitycharitable.org)
Donor-Advised Fund Definition, Sponsors, Pros & Cons, Example (investopedia.com)
What is a Donor-Advised Fund? | NPTrust
5 Situations to Consider Tax-Loss Harvesting – TurboTax Tax Tips & Videos (intuit.com)

LPL Tracking # 490957

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